Reference no: EM132971323

The client: Makaro Limited

Makaro Ltd, an ASX listed freight and logistics company, is based in Toowoomba. Started in September 2012 by siblings, Martin, Karen and Robert Giles, it has taken advantage of the surrounding agricultural and mining activities that require transportation of products out of the region, as well as the strategic location on the Melbourne to Brisbane freight route. Prior to forming the company, Martin had worked for Aurizon Ltd, gaining valuable experience in the logistics industry and had developed a reputation as a visionary. He has been the Chief Executive Officer (CEO) of Makaro Ltd since its inception. Karen had worked as a Project Manager for a mining services company previously and utilises her strong leadership skills in her role as Chief Operating Officer COO). Robert, a Chartered Accountant, is a former Audit Partner at a mid-tier audit firm and fills the role of Chief Financial Officer (CFO). The financial year of Makaro Ltd ends on 30 June each year.

The external auditors: Michael Stephen & Partners (MSP)

Michael Stephen & Partners (MSP) is a medium-sized audit firm providing audit, advisory and taxation services to a number of mostly Queensland-based clients. John Michael and Andrew Stephen are the founding partners of the firm, with an additional forty-three partners in MSP. The audit firm regularly provides training days to ensure their staff can maintain their continuing professional development (CDP) hours necessary to substantiate their ongoing professional memberships. This may include partners updating staff on new accounting standards as and when they are released, or additional training on emerging technologies such as cryptocurrency or audit data analytics. Training on new accounting standards and exposure drafts is mandatory for all audit staff.

Makaro Ltd has been a client of MSP since the company was formed in 2012. John Michael, the senior partner of Michael Stephen & Partners, grew up in Toowoomba and attended Toowoomba Grammar School along with Martin and Robert Giles. Robert and John graduated in the same year and went on to study Commerce together in Brisbane. As they have remained good friends, John has never participated in any of the audits of Makaro Ltd.

For the June 2021 (FY2021) audit, Andrew Stephen is the Engagement partner, while the audit manager is Sandie Gemmell. Sandie is originally from Melbourne and on a recent site visit to the client told Robert that she has not seen her family since Christmas 2019 before COVID hit. Even when the borders opened briefly earlier in the year, she was tied up in Gladstone on an audit and could not get time off. Every time she has been able to take leave it seems to be when another Victoria lockdown is in place. Robert sympathised and indicated that as a logistics company they have fallen under the 'circuit breaker' restrictions that enable them to continue to operate normally throughout Victoria. He suggested "Look, between you and me, assuming this audit goes smoothly, perhaps I can pull some strings to get you on board one of our freight vehicles if the borders remain shut. Here's my business card - give me a call when the audit is wrapped up." Sandie is very eager to see her family as her twin sister recently gave birth to her first nephew, nevertheless she felt uncomfortable about the offer of assistance and discussed it with Andrew.

Luke Asher is part of the audit engagement team for the Makaro Ltd audit, working with Sandie on the audit in 2020. Luke's grandfather recently passed away and, as the only surviving member of the family, inherited his modest estate. Luke has established that part of this estate is an investment of 10 000 shares in Makaro Ltd. Luke has brought this to the attention of Andrew and is currently evaluating his options.

Background and understanding of the client entity

During April 2021, Makaro installed a new off-the-shelf asset management system to manage their fleet of vehicles and related plant and parts. This system replaced a system that had been developed in-house, as the old system could no longer keep up with the company's broader reporting requirements. Makaro Ltd's information technology (IT) department, together with the consultants from the software company implemented the new manufacturing costing system. Key operational staff from Makaro Ltd, together with consultants from the software supplier were significantly engaged in the selection, testing, training and implementation stages. Several customized modifications were made and therefore Makaro has asked MSP to provide an estimate of the valuation of the software system.

Problem 1: Evaluate the professional conduct of Michael Stephen & Partners and its other members in terms of the APES 110 Code of Ethics for Professional Accountants. You do not need to discuss any threats to independence, but rather focus your discussion on the evidence that indicates how the auditors have complied with and/or breached the fundamental principles contained within APES 110 Code of Ethics for Professional Accountants.